1) Because creditors may prefer that firms maintain low exposure to exchange rate risk,
exchange rate movements may cause earnings to be more volatile, and because
investors may prefer corporations to perform hedging for them, exchange rate risk is
probably relevant.
2) The primary component of the capital account is the balance of trade.
3) An advantage of a short straddle is that it provides the option writer with income
from two separate sources.
4) Transaction exposure results when an MNC translates each subsidiary’s financial data
to its home currency for consolidated financial statements.
5) If interest rate parity (IRP) exists, then foreign investors will earn the same returns as
U.S. investors.
6) An example of indirect intervention by the Bank of Japan would be for the Bank of
Japan to use interest rates to increase the value of the yen vs. the dollar.
7) Managers of MNCs may attempt to expand their divisions internationally if their
compensation may be increased as a result of expansion. This goal is consistent with the
goals of shareholders.
8) A decentralized management style of MNC results in relatively high agency costs.
9) An increase in U.S. inflation relative to Singapore inflation places upward pressure
on the Singapore dollar.
10) Futures, forward, and money market hedges all lock into a certain price to be
received from hedging a receivable. For a currency option hedge with a put option,
however, the exact amount received is not known until the option is (or is not)
exercised.
11) Licensing allows firms to use their technology in foreign markets without a major
investment in foreign countries.
12) A European option can only be exercised at the expiration date, while an American
option can be exercised any time prior to the expiration date.
13) One argument why exchange rate risk is irrelevant to corporations is that
shareholders can deal with this risk individually.
14) Adjustments to incorporate country risk into the capital budgeting analysis would
involve either the addition of a risk premium to the discount rate or a reduction of the
cash flows.
15) A straddle is a speculative strategy that represents the purchase of both a call and a
put.
16) If a currency’s forward rate exhibits a premium, that currency is forced to
depreciate.
17) If a currency’s spot rate market is ____, its exchange rate is likely to be ____ to a
single large purchase or sale transaction.
a.liquid; highly sensitive
b.illiquid; insensitive
c.illiquid; highly sensitive
d.none of the above
18) Which of the following could reduce agency problems for an MNC?
a.stock options as managerial compensation
b.hostile takeover threat
c.investor monitoring
d.all of the above are forms of corporate control that could reduce agency problems for
an MNC
19) The 180-day forward rate for the euro is $1.34, while the current spot rate of the
euro is $1.29. What is the annualized forward premium or discount of the euro?
a.7.46% premium
b.7.46% discount
c.7.75% premium
d.7.75% discount
20) The ____ involves the collection of independent opinions on country risk without
group discussion by the assessors who provide these opinions.
a.checklist approach
b.discriminant analysis
c.regression analysis
d.Delphi technique
21) The most important variable in determining a country’s degree of overall country
risk:
a.is political risk
b.is financial risk
c.is the probability of a host government takeover
d.may often vary with the country of concern
22) ____ is not a bank characteristic important to customers in need of foreign
exchange.
a.Quote competitiveness
b.Speed of execution
c.Forecasting advice
d.Advice about current market conditions
e.All of the above are important bank characteristics to customers in need of foreign
exchange
23) The premium on a pound put option is $.03 per unit. The exercise price is $1.60.
The break-even point is ____ for the buyer of the put, and ____ for the seller of the put.
(Assume zero transactions costs and that the buyer and seller of the put option are
speculators.)
a.$1.63; $1.63
b.$1.63; $1.60
c.$1.63; $1.57
d.$1.57; $1.63
e.none of the above
24) If a U.S. firm’s cost of goods sold exposure is much greater than its sales exposure
in Switzerland, there is a ____ overall impact of the Swiss franc’s depreciation against
the dollar on ____.
a.positive; interest expenses
b.positive; gross profit
c.negative; gross profit
d.negative; interest expenses
25) If a foreign currency consistently depreciated against the dollar over several periods
and had lower interest rates at the beginning of those periods than the U.S. interest
rates, then:
a.U.S. firms could have achieved a higher effective yield on foreign deposits than on
U.S. deposits during those periods
b.the international Fisher effect is supported by the results
c.A and B
d.none of the above
26) Of all the payment methods available in international trade, ____ probably affords
the most protection to the exporter, while ____ probably affords the least protection.
a.prepayment; consignment
b.prepayment; open account
c.open account; prepayment
d.consignment; prepayment
27) The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the
Australian dollar was $0.69. The Australian dollar ____ by ____%.
a.depreciated; 5.80
b.depreciated; 4.00
c.appreciated; 5.80
d.appreciated; 4.00
28) In a(n) ____ swap, the notional value is reduced over time.
a.accretion
b.amortizing
c.forward
d.zero-coupon
e.putable
29) A strong dollar is normally expected to cause:
a.high unemployment and high inflation in the U.S
b.high unemployment and low inflation in the U.S
c.low unemployment and low inflation in the U.S
d.low unemployment and high inflation in the U.S
30) The term “global capital structure” is used in the text to represent the:
a.average capital structure of all MNCs across countries
b.average capital structure of all domestic firms across countries
c.capital structure of a subsidiary of a particular MNC
d.capital structure of a particular MNC overall (including all subsidiaries)
31) A strong dollar places ____ pressure on inflation, which in turn places ____
pressure on the dollar.
a.upward; upward
b.downward; upward
c.upward; downward
d.downward; downward
32) National Bank quotes the following for the British pound and the New Zealand
dollar:
Quoted Bid PriceQuoted Ask Price
Value of a British pound (£) in $ $1.61 $1.62
Value of a New Zealand dollar (NZ$) in $ $0.55 $0.56
Value of a British pound in
New Zealand dollarsNZ$2.95NZ$2.96
Assume you have $10,000 to conduct triangular arbitrage. What is your profit from
implementing this strategy?
a.$77.64
b.$197.53
c.$15.43
d.$111.80
33) Countertrade represents foreign trade:
a.restrictions imposed by the government on imports from another country
b.restrictions imposed by the government on exports sent from the country
c.transactions that force the sales of goods of one country to be linked to the purchase
or exchange of goods from the country
d.financing provided to an exporter in exchange for goods provided to the creditor by
the exporter
34) A firm wants to use an option to hedge 12.5 million in receivables from New
Zealand firms. The premium is $.03. The exercise price is $.55. If the option is
exercised, what is the total amount of dollars received (after accounting for the
premium paid)?
a.$6,875,000
b.$7,250,000
c.$7,000,000
d.$6,500,000
e.none of the above
35) ____ is not a cost-related motive for direct foreign investment (DFI).
a.Using foreign factors of production
b.Using foreign raw materials
c.Using foreign technology
d.Reacting to trade restrictions
e.Fully benefiting from economies of scale
36) The Fed may use a stimulative monetary policy with least concern about causing
inflation if the dollar’s value is expected to:
a.remain stable
b.strengthen
c.weaken
d.none of the above will have an impact on inflation
37) Which of the following is the least effective way of hedging exposure in the long
run?
a.long-term forward contract
b.currency swap
c.parallel loan
d.money market hedge
38) Your company expects to receive 5,000,000 Japanese yen 60 days from now. You
decide to hedge your position by selling Japanese yen forward. The current spot rate of
the yen is $.0089, while the forward rate is $.00 You expect the spot rate in 60 days to
be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now
if you sell yen forward?
a.$44,500
b.$45,000
c.$526 million
d.$47,500
e.$556 million
39) Assume the following information:
You have $1,000,000 to invest:
Current spot rate of pound=$1.30
90-day forward rate of pound=$1.28
3-month deposit rate in U.S.=3%
3-month deposit rate in Great Britain=4%
If you use covered interest arbitrage for a 90-day investment, what will be the amount
of U.S. dollars you will have after 90 days?
a.$1,024,000
b.$1,030,000
c.$1,040,000
d.$1,034,000
e.none of the above
40) Which of the following are most commonly traded on an exchange?
a.forward contracts
b.futures contracts
c.currencies
d.none of the above
41) Morton Company obtains a one-year loan of 2,000,000 Japanese yen at an interest
rate of 6%. At the time the loan is extended, the spot rate of the yen is $.005. If the spot
rate of the yen at maturity of the loan is $.0035, what is the effective financing rate of
borrowing yen?
a.37.8%
b.51.43%
c.-25.8%
d.-6%
e.none of the above
42) Assume that interest rate parity holds. U.S. interest rate is 13% and British interest
rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent.
a.discount; 2.73
b.premium; 2.73
c.discount; 3.65
d.premium; 3.65
43) If a firm repeatedly borrows a foreign currency portfolio, the variability of the
portfolio’s effective financing rate will be highest if the correlations between currencies
in the portfolio are ____ and the individual variability of each currency is ____.
a.high; low
b.high; high
c.low; low
d.low; high
44) Which of the following is not true regarding the eurozone?
a.Members cannot set unique monetary policy individually
b.Members cannot apply their own fiscal policies
c.Members have to agree on the ideal monetary policy
d.Its creation allowed for greater political union among its members
45) Which of the following is not mentioned in the text as a form of international
arbitrage?
a.Locational arbitrage
b.Triangular arbitrage
c.Transactional arbitrage
d.Covered interest arbitrage
e.All of the above are mentioned in the text as forms of international arbitrage
46) Assume the following information:
Spot rate today of Swiss franc=$.60
1-year forward rate as of today for Swiss franc=$.63
Expected spot rate 1 year from now=$.64
Rate on 1-year deposits denominated in Swiss francs=7%
Rate on 1-year deposits denominated in U.S. dollars=9%
From the perspective of U.S. investors with $1,000,000, covered interest arbitrage
would yield a rate of return of ____%.
a.5.00
b.12.35
c.15.50
d.14.13
e.11.22
47) According to the text, research generally supports ____ in foreign exchange
markets.
a.weak-form efficiency
b.semistrong-form efficiency
c.strong-form efficiency
d.A and B
e.B and C
48) Translation losses are ____, while gains on forward contracts used to hedge
translation exposure are ____.
a.tax deductible; not taxed
b.not tax deductible; not taxed
c.not tax deductible; taxed
d.tax deductible; taxed